Tax Consequences of a Part Sale, Part Gift
A part sale, part gift transaction is treated as two separate events for tax purposes, impacting both the seller's gain and the buyer's future cost basis.
A transaction that is part sale and part gift, often called a bargain sale, occurs when property is transferred for significantly less than its full worth. This arrangement creates distinct tax situations for both the person selling the property and the person receiving it. The Internal Revenue Service (IRS) does not view this as a single event, but rather as two separate components: a sale for the amount paid and a gift for the value not paid.
Determining the Sale and Gift Components
The first step in analyzing a part sale, part gift transaction is to establish the property’s Fair Market Value (FMV). FMV is the price the property would sell for on the open market between a willing buyer and a willing seller, with neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. An independent appraisal is often the most reliable way to determine FMV, which serves as the baseline for all subsequent tax calculations.
Once the FMV is established, the transaction can be separated into its two constituent parts. The sale portion is the amount of money or consideration the buyer pays for the property. The gift portion is the difference between the property’s FMV and the sale price. For example, if a parent sells a house with an FMV of $500,000 to their child for $300,000, the sale portion is $300,000, and the gift is $200,000.
Tax Consequences for the Seller
The sale portion may result in a taxable capital gain if the sale price is more than the seller’s adjusted basis. The gain is the amount by which the sale price exceeds the basis. For instance, if the seller’s adjusted basis was $250,000 and the sale price was $300,000, the capital gain would be $50,000. The tax rate depends on how long the seller owned the property. If the sale price is less than or equal to the seller’s adjusted basis, no gain or loss is recognized.
The gift portion is subject to federal gift tax rules. From the total gift amount, the seller subtracts the annual gift tax exclusion, which is $19,000 per recipient for 2025. A married couple can combine their exclusions to gift up to $38,000. Any gift amount exceeding the annual exclusion is a taxable gift that is applied against the seller’s lifetime gift and estate tax exemption. No tax is paid until this lifetime exemption is fully used.
Tax Consequences for the Buyer
The buyer’s primary tax consideration is establishing their new cost basis in the property. This basis will be used to calculate their capital gain or loss on a future sale. The rule for determining the buyer’s basis is specific: it is the greater of the amount the buyer paid for the property or the seller’s adjusted basis at the time of the transfer.
Consider the ongoing example where the property’s FMV is $500,000, the sale price is $300,000, and the seller’s original adjusted basis was $250,000. The buyer’s new basis would be the greater of the $300,000 they paid or the seller’s $250,000 adjusted basis. In this scenario, the buyer’s basis in the property is $300,000. If the buyer later sells the house for $550,000, their taxable gain would be $250,000 ($550,000 sale price – $300,000 basis).
A different outcome occurs if the sale price is lower than the seller’s basis. Imagine the same property with a $250,000 seller’s basis was sold for only $200,000. The buyer’s basis would be the greater of the $200,000 paid or the seller’s $250,000 basis. Here, the buyer’s basis would be $250,000, even though they only paid $200,000.
Reporting the Transaction to the IRS
The capital gain from the sale portion must be reported on the seller’s federal income tax return, Form 1040. The details of the sale, including the sale price and the seller’s full basis, are first entered on Form 8949, Sales and Other Dispositions of Capital Assets. The gain calculated on Form 8949 is then transferred to Schedule D, Capital Gains and Losses, which summarizes the seller’s capital gain activity for the year. This final figure from Schedule D flows to the main Form 1040.
The gift portion of the transaction is reported on a separate tax return, Form 709, United States Gift Tax Return. This form is required if the gift amount exceeds the annual exclusion. On Form 709, the seller must report the property’s FMV, the sale price they received, and the resulting value of the gift. It is important to file Form 709 by the tax deadline for the year the gift was made, even if no tax is due, to properly track the use of the lifetime exemption.